MG106 Strategic Management
London School of Economics and Political Science
June 26, 2025
The Cola Wars 🥤
From business models to industry analysis
How do companies selling
colored sugar water 💧
earn 35% profit margins
for over 100 years? 🤔
“Industry structure drives profitability” - Michael Porter
1️⃣ What makes concentrate producers so profitable?
2️⃣ How do they manage the value chain?
3️⃣ Has competition destroyed profits?
4️⃣ Can the magic continue?
15 minutes with your group - Use the Five Forces!
Apply Porter’s framework to the case
What makes concentrate producers so profitable?
Which of the Five Forces explain
the 35% margins?
| Concentrate Producer | Bottler | |
|---|---|---|
| Gross Margin | 83% 📈 | 35% 📉 |
| Pretax Profit | 35% 💎 | 9% 😔 |
| Capital Required | $50M | $75M+ per plant |
| Plants Needed | 1 nationally | 80-85 nationally |
Same industry, vastly different economics - Why?
Think about Virgin Cola, Jolt Cola, OK Soda…
Result: Zero successful entrants in 50+ years
Hint: What exactly goes into concentrate?
Cost: $0.12 → Sells for: $0.71
Suppliers have ZERO power
Two very different types of buyers…
Where is power concentrated? Where is it fragmented?
| Channel | Buyer Power | Bottler Profit/Case | Why? |
|---|---|---|---|
| Fountain 🍔 | HIGH ⚡ | $0.09 | McDonald’s can switch |
| Supermarket 🛒 | MEDIUM | $0.23 | Some negotiation room |
| Vending 🎰 | LOW ✓ | $0.97 | Captive consumers |
| Warehouse 📦 | LOW ✓ | $1.00+ | Drop size matters |
Economics change dramatically by channel
Water is FREE 💧
So why pay for Coke?
| Drink | Price | U.S. Consumption |
|---|---|---|
| Tap Water 💧 | $0.00 | Available everywhere |
| Coffee ☕ | $0.50 | 17 gallons/year |
| Milk 🥛 | $0.25/glass | 22 gallons/year |
| Coke 🥤 | $1.00+ | 53 gallons/year! |
Americans choose the most expensive option most often
Coke redefined what they’re competing against
100 years of battle…
Who won? Who lost?
Both grew by taking from others!
Porter: “Price competition transfers profits to customers”
How do they manage without owning?
Consumer pays $1.00
Who gets what?
Upstream captures most value despite touching no physical product
1899-1980: TRUST ERA 🤝
Independent bottlers • Perpetual contracts • Local princes
1980s-1990s: INTEGRATION ERA 🏭
Buy bottlers • Direct control • Capital intensive
2000s: ORCHESTRATION ERA 🎼
Anchor bottlers • Equity stakes • Control without ownership
Why the changes?
Brilliant design: Aligns incentives perfectly
Has rivalry destroyed profits?
Started blind taste tests
What happened next?
1975: Dallas experiments begin 🧪
1977: Pepsi gains share in test markets 📈
1979: Pepsi passes Coke in supermarkets! 😱
1985: Coke panics, changes formula 🥤
1985: “New Coke” disaster → Classic returns 🎉
Result: Massive publicity for both brands 📺
Competition increased total demand
Can 35% margins last forever?
| Metric | 1970-1995 | 2000 | Trend |
|---|---|---|---|
| Volume Growth | 3-7% annually | 0.2% | 📉 |
| Per Capita | Rising | Flat at 53 gal | 😐 |
| Non-carbs | Minor | 18% growth | 🚀 |
| Health Concerns | Low | Rising | ⚠️ |
First stagnation in 100 years
Which force worries you most?
Defend cola profits
Harvest cash
Accept slow decline
Risk: Irrelevance
Total beverage company
Buy growth brands
Leverage distribution
Risk: Complexity
China: 22 vs US: 874
India: 6 servings/year
Massive potential
Risk: Different game
What would Porter advise?
The Five Forces explain everything
Not luck. Not genius. Structure.
Same industry, different forces
CPs 35% margins vs Bottlers 9% margins
Competition can create value
If you follow the right rules
Today’s fortress, tomorrow’s prison?
Watch for shifting forces
Write them down - 2 minutes
Preview:
See you tomorrow! 👋